IMF’s Poisoned Pill

“We see increase in oil reference price as a threat because the money will be shared by the three tiers of government. It will increase spending and inflationary spending. We think a reference price of $75/barrel is better than $78, and $78 is better than $80/barrel, but that is if the difference is saved.”

The above is the statement of Scot Rogers, the Senior Resident Representative of IMF in Nigeria, at the recent IMF Sub Saharan Regional Economic Outlook for 2013 in Abuja.

The Finance Minister and Coordinating Minister of the Economy, Dr. Ngozi Okonjo-Iweala, is also reported by Reuters News Agency to “strongly believe that $75 is the right benchmark for us; it will help us to build buffers”. Indeed, both CBN Governor, Lamido Sanusi, and Finance Minister had a few weeks earlier also insisted that a 2013 budget crude price benchmark above $75/barrel would ‘hurt’ the economy.

In consideration of above expressed concerns, we will briefly discuss the following issues; benchmark determination, alleged negative impact of higher price benchmark, and the touted benefits of increasing reserves.

President Jonathan indicated a scientific methodology for forecasting international crude price movements in the 2013 Appropriation Bill. In reality, even if such a pseudo-scientific model exists, it cannot be a precise science; it would probably be easier to have predicted the occurrence of the recent hurricane ‘Sandy’ three years earlier, than to accurately predict price movements in the international oil market.

In any event, the failure of this model is probably amplified by the wide disparities between projected benchmark prices and actual prices within the three years that Dr. Iweala indicated that this model had been adopted for Nigeria’s budget projections.

Indeed, if crude prices remained at an average of about $100/barrel at a time that the world economy is in ‘bad shape’ as currently observed, it should be expected that oil prices will rise when the world economy begins to ultimately turn around, rather than fall.

The argument that fresh discoveries of oil reserves would drive down prices is probably also self-serving and inappropriate, as new oil discoveries have become an integral part of the supply curve for decades and yet have never prevented spiralling prices!

The other question is whether a higher price benchmark would predicate economic doom as predicted by the IMF and others. The answer is the retrospective evidence of a battered economy in the last three years, during which budget benchmarks were conservatively calculated below 25% of the actual average.

National debt has, in fact, doubled, and service charges have similarly more than doubled, and is projected to increase to over N590bn in 2013! Meanwhile, in spite of the actual reality of average crude prices of over $100/barrel in 2012, domestic borrowing instigated by ‘ghost deficits’ induced by a very conservative crude oil price benchmark would exceed N727bn with cost of borrowing in excess of 15%!

It is instructive that the IMF would recommend that we sustain huge ‘ghost deficits’ financed at such atrocious rates, when currently economically challenged countries like Spain and Greece would be reluctant to borrow at over 6%!!

It is also inexplicable that the IMF and others refuse to recognise that the crowding out of the real sector from the credit market is the collateral of government borrowing at such excessive rates of interest! The IMF may pretend ignorance that the cost of lending to the real sector at 20% currently exceeds levels that can stimulate consumer demand, or engender industrial growth and increasing employment opportunities.

Once again, it is amazing that a respectable agency such as IMF would recommend that any country should accumulate savings with a paltry yield of 2 – 3%, while that country borrows at the oppressive rates of 15% and above; i.e. rates that are totally out of consonance for government risk-free sovereign debts to finance budget ‘ghost’ deficits. It is even more worrisome that respected Nigerian technocrats would accept such oppressive public sector economic management as best practice!

Instructively, this obtuse fiscal strategy has increased national debt accumulation just as quickly as it has added to our foreign reserves!! Thus, our consolidated national debt of over N8 trillion is now probably more than our current reserve base of about $40bn.

It is even more baffling that our experts miss the link between our deepening poverty, in spite of increasing wealth, to the recklessness of CBN’s substitution of naira allocations for the crude oil dollar revenue it illegally captures from the three tiers of government!!

In view of the above considerations, the vociferous warnings of the IMF and Oil Minister would seem to be ‘alarmist in nature’, so that we would become intimidated, by the fear of economic jeopardy, to tow IMF’s misguided subtle directives at economic suicide.